Applying the SSA: Documentation requirements and steps to take

Key takeaways:

Businesses still need to prepare transfer pricing documentation to support their application of the SSA. This includes a functional analysis of the transactions, copies of contracts, financial data segmentation, and reconciliation to financial statements.
Taxpayers who choose to use the SSA for the first time need to document consent in their local file or equivalent report, committing to applying the SSA for at least three years. Exceptions are allowed if in the following years no transactions are in the scope of the SSA or there are significant business changes.
Taxpayers must notify their tax authorities of their intention to apply the SSA. The specific format for this notification is not specified by the OECD, but it is a required step for using the SSA.

This is part two of a two-part article series on the OECD’s Simplified and Streamlined Approach (SSA). Part one provides an overview of the SSA and can be found below if you missed it:

- Understanding the OECD’s Simplified and Streamlined Approach | RSM Global

Scheduled to take effect in financial years beginning on or after 1 January, 2025, the Simplified and Streamlined Approach (SSA) is a crucial component of the OECD's ambitious initiative to reform the international tax system. The OECD has integrated the SSA into its General Transfer Pricing Guidelines, and countries adhering to these guidelines can adopt the SSA.

In this part, RSM’s experts discuss the documentation requirements, issues for consideration, and actionable steps that businesses can take.

Documentation requirements for the SSA

The SSA brings specific documentation requirements that build upon the existing guidelines from Chapter Five of the OECD Transfer Pricing Guidelines. Here’s an overview of what businesses need to prepare:

Local file requirements

Transfer pricing local files will still be required where the SSA is used and retain most of the content that will be familiar from existing requirements. Where the SSA is used, the local file must now delineate the in-scope qualifying transactions and show how the SSA has been applied. These requirements are comprehensive and aim to provide a clear and thorough explanation of the transactions subject to the SSA. The documentation should encompass:

Detailed functional analysis: A thorough analysis of the functions performed, assets used, and risks assumed by the entities involved in the qualifying transaction.
Written contracts: Copies of contracts that outline the terms and conditions of the transactions.
Calculations for SSA application: Detailed calculations that demonstrate how the SSA has been applied, including the use of the pricing matrix. These would replace the comparables benchmarking currently set out in the economic analysis.
Financial segmentation: Segmentation of financial data to reflect the different business activities and ensure accurate application of the SSA.
Reconciliation to financial statements: A reconciliation of segmented amounts to the annual financial statements to ensure consistency and accuracy.

First-time application and consent

When a taxpayer opts to apply the SSA for the first time, they must include a consent form within their local file or equivalent document. This consent signifies the taxpayer's commitment to apply the SSA for a minimum of three years. However, there are exceptions:

Out-of-scope transactions: If a transaction falls out of the SSA scope during the three-year period, the commitment to apply the SSA may be reconsidered.
Significant business changes: Major changes in the taxpayer’s business operations can also justify a deviation from the initial three-year commitment.

Notification to tax authorities

Taxpayers must notify their tax authorities of their intention to apply the SSA. While the OECD has not specified the exact format for this notification, it is a critical step in ensuring transparency and compliance with the new approach.

Options for adoption

Having examined the background and mechanics of the SSA, let us turn our attention to the anticipated adoption by various jurisdictions.

Expected adoption by jurisdictions

Jurisdictions will have two options for implementing the SSA:

Mandatory requirement: Under this option, the SSA will replace the existing approaches to supporting an arm’s length return for baseline distribution and marketing activities, becoming the standard approach.
Safe harbour: In this scenario, taxpayers can choose to adopt the SSA, thereby replacing their current transfer pricing approach for the specified activities. Alternatively, they can continue with their existing methods.

Implementation scenarios

Mandatory requirement: If a jurisdiction opts to implement the SSA as a mandatory requirement, it will entirely supplant the current transfer pricing approach for baseline distribution and marketing activities. This approach enforces uniformity and may simplify the compliance process for businesses within that jurisdiction.

Safe harbour: If adopted as a safe harbour, the SSA offers flexibility. Taxpayers can decide whether to apply the SSA or retain their existing transfer pricing methods. This option provides welcome flexibility, as it will enable those businesses that are a clearer fit for the characterisation of baseline distribution activities to be early adopters, while others are allowed a longer run-in to the new regime.

Cross-border challenges

A key aspect of the SSA is its non-binding nature on the counterparty jurisdiction to a transaction. Since transfer pricing involves two countries, the unilateral adoption of the SSA by one country may lead to complications, especially if the counterparty country chooses not to adopt or acknowledge the SSA. This divergence could result in inconsistencies and disputes in transfer pricing assessments or, at the very least, the need to continue with traditional benchmarking to support the return in the counterparty territory. This risks removing any benefit from streamlining compliance, and could actually add to the work required.

Actions and next steps

Having delved into the background, mechanics, and potential adoption of the Simplified and Streamlined Approach, it is crucial to outline key issues and actionable steps for businesses.

Key issues for consideration

1. Characterisation analysis:

Understand your business model: Ensure your business model aligns with the SSA's expectations. This is particularly important for businesses with high volume but low margin operations, which may be impacted by the SSA’s cap-and-collar, and for businesses which sell products that may overlap with more than one product category.
Clear characterisation: Establish a clear understanding of your transactions to prevent disputes with tax authorities.

2. Pricing integration:

ERP system integration: Consider incorporating SSA-compliant pricing into your Enterprise Resource Planning (ERP) system. This ensures that the pricing outputs can be easily subjected to SSA outcome testing.

3. Customs compliance:

Align SSA with customs requirements: Ensure that SSA compliance does not conflict with existing customs policies. Streamlining transfer pricing with customs regulations can maximise efficiency and prevent regulatory issues.

4. Supporting documentation:

Evidencing steps: Even with a formulaic approach, thorough documentation is essential. Address potential areas of controversy, such as accounting standards or data sources, upfront.

5. Assessing benefits:

Evaluate the SSA’s impact: Understand if the SSA will genuinely reduce your compliance burden. For some businesses, adopting the SSA might be advantageous, while others might find it more beneficial to wait and observe how the rules are applied and adjusted over time.

Actionable steps for businesses

1. Understanding SSA applicability and identify relevant areas:

Ensure that your team understands whether, where and how the SSA might apply within your organisation.

2. Confirm jurisdictional approaches:

Stay updated on each jurisdiction's plans for SSA implementation and adjust your strategies accordingly.

3. Review and confirm characterisation of distribution activities:

Understand the characterisation of your distribution activities and identify if and where data segmentation will be required.

4. Identify financial data sources:

Ensure you have clear data sources for financial reporting and consider the practicality of streaming data for SSA compliance.

5. Impact modelling:

Evaluate your options. Consider running trial calculations for the most recent year where you have financial data. If there is an option for a safe harbour, assess its benefits. Understand the impact on both the distributor and the principal side to anticipate any potential controversies.

6. Stakeholder engagement:

Engage stakeholders early, both within the business and across distributor companies and finance teams, to prepare for changes.

7. Review and update documentation:

Take the opportunity to review and update your documentation, ensuring it is robust, clear, and efficiently communicates the necessary economic analysis and key messages.

8. Treat SSA as a live issue:

Recognise that the SSA will be effective in financial years starting on or after January 1, 2025. Although some aspects may still need clarification, treat it as an immediate priority. Stay informed about further guidance from the OECD and national tax authorities and prepare for the SSA’s potential impacts on your business.

For more information on the Simplified and Streamlined Approach, watch our latest webinar discussing it.

For any other information regarding transfer pricing or if you would like to get in touch, visit our transfer pricing page.